CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA' rating to the following Illinois Finance Authority revenue bonds to be issued on behalf of Advocate Health Care (Advocate):
--$100 million series 2015.
In addition, Fitch affirms the 'AA' rating on approximately $1.4 billion of revenue bonds issued by the Illinois Health Facilities Authority and the Illinois Finance Authority on behalf of Advocate.
Fitch also affirms the 'F1+' short-term ratings on the following Illinois Health Facilities Authority and Illinois Finance Authority bonds based upon self-liquidity provided by Advocate:
--$38.66 million put bonds, series 2003A&C;
--$21.975 million put bonds, series 2008C-3B;
--$70 million variable rate demand bonds (windows mode), series 2011B.
The series 2015 bonds are expected to be fixed rate, and finance, refinance, or reimburse Advocate for prior capital expenditures, as well as pay costs of issuance. The series 2015 fixed rate bonds are expected to price the week of Sept. 7, 2015 via negotiated sale.
The Rating Outlook is Stable.
SECURITY
The bonds are unsecured obligations of the obligated group.
KEY RATING DRIVERS
Light Debt Burden: The affirmation at 'AA' incorporates Advocate's 2015 financing, which will seek to reimburse for prior capital expenditures, and will not materially impact Advocate's relatively low debt burden. Advocate's pro forma maximum annual debt service (MADS) of $97 million equates to a light 1.9% of annualized 2015 revenues which combined with solid cash flow generation results in strong coverage of 9x by EBITDA through the six months ended June 30, 2015.
Ample Liquidity: Advocate's robust operating cash flow generation continues to support substantial balance sheet strength and support steady capital improvement. At June 30, 2015, Advocate's unrestricted cash and investments totaled approximately $5 billion, up nearly 6% since fiscal year end. Liquidity metrics were robust with 383.9 days cash on hand (DCOH), a pro forma cushion ratio of 51.9x and cash and investments equating to 316.5% of long-term debt, all of which exceed Fitch's respective 'AA' category medians of 289.4, 27x and 201.7%.
Solid Market Position: Advocate maintains a leading position within its six-county Chicago metropolitan service area that is nearly double its nearest competitors, and remains the largest provider in the state. Still, the service area is highly competitive, and the regulatory environment in Illinois remains challenging.
Strong Clinical Integration: The rating also reflects Advocate's high level of integration with its clinicians has produced better care coordination, operating efficiencies, effective contracting, physician engagement, and should position it well to navigate an ongoing shift toward value-based reimbursement.
RATING SENSITIVITIES
NorthShore Merger: Advocate and NorthShore University Health System (not rated by Fitch) signed a definitive affiliation agreement in September 2014 to merge, which Fitch views positively. The merger would likely support further operating efficiencies across the organization. Fitch will assess any rating impact if and when the transaction finalizes, which is expected within the next three to six months.
CREDIT PROFILE
Advocate is an integrated health care system serving the Chicago metropolitan area and central Illinois. The system includes 11 acute care hospitals and an integrated children's hospital (totaling approximately 3,600 licensed beds), two large physician groups offering both primary and specialty physician services, home health, hospice care, and outpatient centers serving the Chicago metropolitan area and central Illinois. Total revenues in fiscal 2014 (Dec. 31 fiscal year end) were $5.2 billion.
Fitch's analysis is based on the consolidated system. The obligated group consists of Advocate Health Care Network Corp, Advocate Health and Hospitals, Advocate North Side Health Network, Advocate Condell Medical Center, and Advocate Sherman Hospital. As of Dec. 31, 2014 the obligated group represented approximately 91% of consolidated assets and 92% of total operating revenues of the consolidated system.
Series 2015 Debt
Advocate plans to issue $100 million in series 2015 fixed rate bonds, which will be used primarily to finance and/or reimburse prior capital expenditures. The series 2015 bonds will have a 2045 maturity, and consolidated debt service is level through 2038. Fitch used $97 million as pro forma MADS, which Advocate covered at 9x by EBITDA at June 30, 2015. Advocate remains very lightly levered, with MADS equal to just 1.8% of annual revenue through June 30, 2015.
Advocate may also issue additional series 2015 debt to refund existing debt, depending upon market conditions, which Fitch believes would not impact the rating.
Self-Liquidity Rating
The 'F1+' rating reflects Advocate's availability of highly liquid resources to cover the mandatory tender on $130.635 million of debt that is subject to unremarketed puts. At June 30, 2015, Advocate's eligible cash and investment position available for same-day settlement would cover the maximum mandatory tender on any given date well in excess of Fitch's criteria of 1.25x.
Advocate provided Fitch with an internal procedures letter outlining the procedures to meet any unremarketed puts. In addition, Advocate provides monthly liquidity reports to Fitch to monitor the sufficiency of Advocate's cash and investment position relative to its mandatory put exposure.
Debt Profile
Following the series 2015 issuance, Advocate will have approximately $1.6 billion in long-term debt outstanding. Approximately $920.8 million is fixed rate, $321 million is variable rate demand debt supported by standby bond purchase agreements (SBPAs), $120.3 million is multi-annual tender bonds with long-term interest rates and have mandatory tenders in 2019 and 2020, $60.6 million is tender bonds with mandatory tender dates in May and July, 2016, $100 million is variable rate direct placement debt, and $70 million of variable rate bonds in a windows mode.
Advocate is party to $326.3 million notional in swap agreements, which had an aggregate negative $83.7 million mark-to-market as of June 30, 2015. No collateral was required to be posted as of June 30, 2015.
Disclosure
Advocate's disclosure includes annual audited financial statements as well as quarterly unaudited balance sheet, income statement, cash flow statement, an extensive MD&A, and utilization statistics. The information is posted to the Municipal Securities Rulemaking Board's EMMA system. In addition, management holds routine calls with rating agencies and with investors. Fitch considers Advocate's disclosure standards to be best practice.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Rating U.S. Public Finance Short-Term Debt (pub. 07 Jan 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=846969
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
U.S. Nonprofit Hospitals and Health Systems Rating Criteria (pub. 09 Jun 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=866807
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=990114
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=990114
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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